Decentralized Clearing in Financial Networks

Péter Csóka, P. Jean-Jacques Herings
  • Management Science, October 2017, INFORMS
  • DOI: 10.1287/mnsc.2017.2847

Decentralized Clearing in Financial Networks

What is it about?

We consider the cascade effects of default in financial networks, where agents have mutual claims on each other. A clearing procedure specifies how much money each agent will end up, an in particular, who will go bankrupt. We show very general conditions under which all decentralized clearing processes lead essentially to the same as a centralized clearing procedure.

Why is it important?

As a policy implication, it is not necessary to collect and process all the sensitive data of all the agents simultaneously and run a centralized clearing procedure. Our main application is financial networks, but our results can also be applied to supply chains, international student exchange, servers that process jobs, and time banks.

Perspectives

Dr Péter Csóka (Author)

Central clearing counterparties also face network effects of clearing. Blockchains offer the ability to validate the execution and settlement of a transaction carried out upon its network without the need for a central third party, using distributed ledgers. More details about a possible industry application I was involved: http://www.bankingtech.com/1051262/implementing-derivatives-clearing-on-distributed-ledger-technology-platforms/

Read Publication

http://dx.doi.org/10.1287/mnsc.2017.2847

The following have contributed to this page: Dr Péter Csóka